QE3 R.I.P., What It Could Mean for Stocks

Yesterday, the Federal Reserve followed through on its well-telegraphed intent to end quantitative easing (QE) as planned this month. Now investors wonder how this milestone will impact markets, if at all.

Just to recap the recent history of Fed money-printing; QE1 was hatched by then Fed Chairman Ben Bernanke during the darkest days of the 2008 financial crisis, and later expanded to include purchases of Treasury bonds, mortgage-backed securities (MBS) and government agency debt from 2009 to 2010.

With the economy still sluggish in 2010, the Fed launched a second round of bond buying, QE2, which was followed in 2011 by Operation Twist, when the Fed essentially swapped short-term government debt for longer-term bonds.

Finally, Act III of this monetary-policy play began in September 2012, when QE3 was launched. The Fed began tapering the pace of its QE3 purchases late last year, a process the Janet Yellen led Fed continued, until finally confirming yesterday that quantitative easing will end this month — at least for now!

The Fed’s Big Bet

All told, the Fed has invested nearly $4 trillion of money it essentially created out of thin air in various fixed income securities over the past six years. Add in the ongoing reinvestment of maturing debt and the commitment swells to $6.6 trillion, juicing financial markets in the process!

Now the question is, with QE3 over, will markets react badly, or will QE make a comeback? Here’s my take …

First, Fed officials have debated whether to delay the end of QE amid concerns about a deflationary spiral in Europe. QE3 may be ending, but remember this is the third-round of bond buying after all.

Make no mistake; the Fed won’t hesitate to do even more if the economy weakens further.

Second, the world is still awash in QE with other central bankers from Europe to Japan committed to more quantitative easing. In fact, Yellen’s counterpart, Mario Draghi, chief of the European Central Bank (ECB) just went all in … again, launching QE Euro style. The ECB has promised to buy up to $1.3 trillion worth of European corporate and government bonds.

Expect other global central banks to pick up the slack where Fed QE leaves off.

Third, just because the Fed is no longer committing newly printed money to bond purchases, it remains a very active participant in the markets. The Fed balance sheet is bloated with $4.5 trillion worth of bonds purchased in multiple rounds of QE.

And the Fed has pledged to keep holding these securities on its balance sheet — for years if necessary — while continuing to reinvest proceeds of maturing bonds.

In fact, Janet Yellen is on record saying it “could take to the end of the decade” before the Fed reduces its bloated balance sheet. Expect this to help keep a lid on interest rates and continue to stimulate the economy, not to mention financial markets.

Bottom line: The monetary world hasn’t changed all that much just because QE3 is over. The Fed, and other major central banks, still maintain extremely easy monetary policies the world over, and won’t hesitate to do more if they think it’s necessary.

The Gift That Keeps Giving Upward Momentum to Stocks

As Bloomberg columnist Jeff Kearns recently quipped: “Quantitative easing may turn out to be a gift that keeps on giving for the U.S. economy.” The consequences of the Fed’s multi-trillion dollar bet will continue to influence markets long after QE3 is forgotten. As a result, fears of another sudden stock market selloff post-QE are likely overblown.

And as I pointed out recently, stocks have just entered the seasonal sweet-spot, making this time of year the best to be a buyer of select stocks. According to my friend Jeff Hirsch, editor of the Stock Trader’s Almanac: “Historically speaking, we can expect a solid market advance between now and sometime in the second quarter of 2015. However, as we have witnessed in recent weeks the market is still susceptible to brisk declines.”

In fact, based on average stock market returns dating back almost a century, the S&P 500 could gain 19.6 percent over the next six to nine months, and that’s just the average return. Frequently the seasonal gains have been even better than this!

With that in mind, the advice from my last Money and Markets column still stands: “This correction should result in a wonderful buying opportunity for a year-end rally … that may continue well into 2015!”

But I want your views. Should stock investors be worried about the end of QE? Or are you ready and waiting to take advantage of a year-end buying opportunity? It’s your turn to sound off; let me know your thoughts by commenting here!

Good Investing,

Mike Burnick

Mike Burnick, who has over 25 years of professional investment experience, is the Director of Research at Weiss and editor of Options Power Trader. Mike has been a Registered Investment Adviser and portfolio manager responsible for the day-to-day operations of a mutual fund. He also served as Director of Research for Weiss Capital Management, where he assisted with trading and asset-allocation responsibilities for a $5 million ETF portfolio.

{21 comments }

Richard WendtThursday, October 30, 2014 at 9:12 am

There is a story going round from a government insider that they had to stop because the Fed is insolvent, and their only recourse is to talk the market up.

FLETCHER PHELANSaturday, November 1, 2014 at 9:53 am

Of course, the Fed is insolvent! Washington is insolvent as well, so now, on election day, we can “fire” those who helped cause this mess, and we shall replace many of them–for good!

And hen we shall celebrate, keeping in mind what you have told us in the memo about the stock market giving us great returns in the near future–and possibly for a long time to come.

mansourThursday, October 30, 2014 at 9:25 am

please inform some secret and serious investment and thank you for your understanding

MANSOUR

FLETCHER PHELANSaturday, November 1, 2014 at 9:54 am

Kinder Morgan Inc. KMI

F.P.

Terrell StanleyThursday, October 30, 2014 at 9:30 am

It seems to me that manipulated low interest rates are destroying personal capital by forcing savers to spend their principal in retirement; leaving less to pass to family thus insuring that they rely more on government in their future.

Thank you.Thursday, October 30, 2014 at 9:57 am

Without being expert in the intricacies of the matter I nevertheless have a strong gut feeling that QE is something that should not be a factor in our economy. I am glad to see it go and hope it never returns. James Kussy

Daniel VictorThursday, October 30, 2014 at 10:15 am

What does bother me,Mike,is that all of this has to be viewed within the context of the US Government’s continuing need for extra funds,as its debt mountain grows.If the Fed doesn’t spend new money on buying new Treasuries,who will take up the slack ?

jrj90620Thursday, October 30, 2014 at 10:59 am

Totally agree with Mike.The Fed is more powerful today,than ever in history.Now,that is has set a precedent of creating unlimited fiat currency,there is nothing stopping the Fed from doing future QE’s,if the economy slows down.Most Americans,today,are fine with massive govt and look to govt to solve all problems.About the only thing that would reduce the Fed’s power,is if the Dollar crashes.

Steve EttingerThursday, October 30, 2014 at 11:01 am

Thank god, the Funny money pumping has stopped. If we need to take our lumps and regroup as a society, take responsibility for our own affairs, and move forward, then we n3eed to stop borrowing. We don’t owe other countries any favors when everyone is paid off. We need to move away from unemployment benefits and build from within here in the United States. IF unemployment benefits are going to continue to swell, then at least have the guts to give people collecting unemployment part time work in their communities to SAVE MONEY, work in parks, clean graffiti, help out in clothing shelters and food banks, and the hours logged can count towards unemployment benefits. I am sick of – IF IT IS FREE IT IS FOR ME.! As for the market, I have lived thru Black Monday, The Tech Crash, and the 2008 Crash. We are due now for a correction of 1500 to 2500 points. NYSE- 14,500………….Then it would be a great time to buy undervalued quality stocks and then let it ride. Any takers?

RUSS SMITHThursday, October 30, 2014 at 11:51 am

Hi!, Mike, Martin, Larry & Staff:
All the quintillions of $’s made by the elite !% who have the extra money to invest in the DOW etc. gives the average Joe Six Pack the leverage he needs to live a descent life? I’m certainly not sure either of you have a handle on the ills of this country thinking that making more fiat $’s in the stock markets for those who can participate is all that’s wrong and I’m not discounting OUR foreign intrigues. We have basic structural problems the least of which is an artificially stimulated Stock Market going to 500,000 or whatever lies in store via fiat money creations however they by whomsoever they are achieved. No matter what markets are stimulated etc. by the powers that be or their affiliated stock market hacks, NEVER in all of history has any country’s economy thrived/prospered via Fiat Money tactics no matter how seemingly sophisticatedly they are arranged. FRANCE’s prelude to the FRENCH REVOLUTION was begun by the influence of those who talked the Nation into an orgy of Fiat Money creation as perhaps you three know already? The persistence of stock jobbing in the French markets were greatly overblown and the Luxury Classes in Paris thrived; while, according to Andrew Dixon White in his major treatise of this era, Fiat Money Inflation In France; how it came; what it brought and how it ended, culminates at this time in my consciousness with these striking words of precaution: “The working classes of France, though having in their possession yet more and more currency (due to wage increases followed by price increases in wave after wavel: emphasis mine) yet they grew lean (poor). Of coarse these poor could NEVER get ahead for they had no money to play the stock market games/gains etc. It took professionals to keep up with the rising CPI; while the only comments heard of coarse by shoppers were the never ending price hikes that eventually made every purchase a pure speculation. Of coarse also by Natural Laws via which those in the know could, they invested in Gresham’s Law and or sent their specie capital abroad hidden from use ever again in France’s economy and many astute, adroit members of the French system that was in major decline left France forever never to return. This time looks far different to me, because as OUR Lord and Master has forewarned us more than 2,000 years ago there will be no place to go, because He said it will come upon the inhabitants of the entire planet. He also promised US, that when we see all this coming upon the Earth to look up and rejoice, because OUR redemption is close at hand and He illustrated this fact didn’t he with the parable of the Fig Tree? He also forewarned US of the deceitfulness of riches as well and he voided that mainline insult to humanity; when He sent His Holy Spirit upon 120 committed disciples we can find in Acts 2 and let me add that that for me would represent a brand new kind of economy neither socialism nor capitalism, because all the arrangements were made by the fruits of the Holy Spirit we find in Galatians 5 including love, peace and joy to name only 3 of the 9 available to each of us. Tell me this guys: if the fiat paper fails and the majority of the poor American citizens have no specie with which to renew their economy where does that leave them? You guys and the extinct US government have enough funds for a handout to restart America? The Constitution was designed to protect all of US from reaching this point of economic chaos wasn’t it and most especially Article 1; Section 10 which calls for specie gold and silver coins only as OUR money supply Minted freely by the US Mint. Now, the US Mint is in the business of selling gold and silver plus a commission which is not free by any means is it guys? As already stated we are in a Humpty Dumpty economy that is broken and all the Kings horses and all the Kings’ men can’t put Humpty Dumpty back together again so what should we do eat cake? My main thesis here is “WHAT WOULD JESUS DO” and does anyone in this world even have a clue?

I don`t think anyone really knows. It`s a bunch of betting and guessing. Harry Dent is of the opinion that the DOW will fall to 2008 lows and lower while others like the Weiss staff believe that ther will be a small 10 to 15 % correction and then take off for the moon. I like the Weiss scenario but it remains to be seen what will actually happen.

DrRGPThursday, October 30, 2014 at 1:29 pm

Could I possibly introduce you to our friend, the paragraph, and the idea of having many such friends when there is so much for importance to say?

DrRGPThursday, October 30, 2014 at 1:27 pm

The nonprofessional (e.g., the present writing) still cannot grasp how trillions of dollars can be printed by the Fed “out of thin air” (as the article notes) without there being, eventually, some kind of inflationary pressure. That is because the average nonprofessional is most likely a monetarist, believing that prices of goods and services rise when there is more and money printed money chasing after them.

So far, at least, this expectation hasn’t been fulfilled. I remain nonplussed.

good analysis of effect of qe-2Thursday, October 30, 2014 at 2:17 pm

THIS REPORT IS DATED OCT30 2014 AND IT SAYS THE CORRECTION IS A GOOD OPPRTUNITY TO BUY STOCKS .
NOV1 -DEC 31 2014 WHAt % of market correction we looking at?

James AsherThursday, October 30, 2014 at 3:40 pm

Mike, it is obvious that the FED, must keep printing money, even if they have stopped temporarily. We as a nation are so far in debt that it is impossible to stimulate the economy enough to bail ourselves out. Certain news channels are always asking “how much money will you need to retire on”? I would like to answer this way: tell me how long the FED is going to print Fiat money and I will tell you how much I will need to retire on. In 1988, fifty cents would buy what a dollar will today. Any nation that allows the value of it’s money to deteriorate in value at the rate ours has been since 1971, is going to become insolvent before very long. The stock market is propped up on a deck of cards and will come crashing down before long. Billion’s will again be lost by ordinary investor’s even though only about 15 percent of working class people can even afford to invest in the market. The wealthy know better how to protect themselves when a market crashes and of course a wink or a nod from the insiders always helps those in the know. The FED, has destroying the wealth of ordinary savers by keeping the interest rate near zero for so long. Many are being forced to dip in to their life long savings just to survive. Meanwhile, the upper one or two percent are becoming filthy rich thanks to Janet Yellen, and her band of wealthy manipulator’s..

RalphThursday, October 30, 2014 at 9:11 pm

I think it depends on the mid-term elections—If the repub’s take the senate,the other powers that be (Yellen includ4ed) May want to sabatage the market–to an extent– and blame it on the republicans in order to win the presidential election,later–Which usually has a coat-tail effect for the winner’s party…They can be very clever.

Donald LinkFriday, October 31, 2014 at 11:46 pm

QE was a distortion of normal economic activity. Yes, there will be a blip of sorts when the addict no longer gets his daily fix but he will be healthier in the long run and so will we when savers are properly rewarded and investing reflect true conomic progress rather than a collection of numbers that few believe and even fewer rely on.

MarlonSaturday, November 1, 2014 at 12:28 am

Hi @ Russ Smith,

If you truly believe in our Lord Jesus Christ, you know that we are not of this world….but we are here to proclaim the TRUTH about Salvation…

read John 3:16-17
“For God so loved the world, that He gave His only begotten Son, that whoever believes in Him shall not perish, but have eternal life. “For God did not send the Son into the world to judge the world, but that the world might be saved through Him.…

read Matthew 24:28-30
“Wherever the corpse is, there the vultures will gather. “But immediately after the tribulation of those days THE SUN WILL BE DARKENED, AND THE MOON WILL NOT GIVE ITS LIGHT, AND THE STARS WILL FALL from the sky, and the powers of the heavens will be shaken. “And then the sign of the Son of Man will appear in the sky, and then all the tribes of the earth will mourn, and they will see the SON OF MAN COMING ON THE CLOUDS OF THE SKY with power and great glory.…

the Salvation is in believing in the Word of God, the Saving Grace, the Holy Spirit in a believing man’s heart….

read John 14:16
And I will ask the Father, and he will give you another
advocate to help you and be with you forever …

read John 14:26
But the Advocate, the Holy Spirit, whom the Father will send in my name, will teach
you all things and will remind you of everything I have said to you. …

read John 16:6-7
“But because I have said these things to you, sorrow has filled your heart. “But I tell you the truth, it is to your advantage that I go away; for if I do not go away, the Helper will not come to you; but if I go, I will send Him to you.

read John 16:15-16
“All things that the Father has are Mine; therefore I said that He takes of Mine and will disclose it to you. “A little while, and you will no longer see Me; and again a little while, and you will see Me.”

read John 5:24
“Very truly I tell you, whoever hears my word and believes him who sent me has eternal
life and will not be judged but has crossed over from death to life. …

A humble bond-servant of our LORD JESUS CHRIST, the Holy Spirit promised by the Holy Father in Heaven,

Marlon

Tactical111Saturday, November 1, 2014 at 1:27 pm

When the “stars fall” I guess the Markets will too? Dang, I hate when that happens…unless I’m short. :-)